The central bank of India is expected to maintain interest rate stability far into this year, as concerns about fiscal populism are stoked by the governing party of Prime Minister Narendra Modi's lackluster election victory.
All 34 analysts surveyed by Bloomberg predict that the Reserve Bank of India will likely keep the benchmark rate at 6.5% at its Friday meeting, marking the institution's eighth consecutive meeting. It is also anticipated that the six-person monetary policy committee would not change its position.
Only a few days have passed since Modi's Bharatiya Janata Party was forced to form a coalition administration after losing its majority in parliament.
In order to maintain support, a BJP-led government may decide to deviate from its planned budget and increase welfare expenditure, which might increase inflation, which is currently over the RBI objective, according to economists.
Economists Samiran Chakraborty and Baqar Murtaza Zaidi of Citigroup Inc. stated that the central bank would "have to watch the fiscal outcome of the next month's budget now more closely before considering the monetary policy path." "With the focus on lowering volatility in uncertain times, a status quo in the June policy is an even more likely outcome.” Assuming the US Federal Reserve makes a change of direction, economists have already been delaying their predictions for rate reduction until later in the year.
With a hold nearly guaranteed, traders would be concentrating on Governor Shaktikanta Das' opinions about the incoming administration and its proposed budgetary measures. However, the government has considerable leeway to increase spending thanks to the RBI's record Rs 2.1 trillion ($25 billion) dividend.
Regarding system liquidity, traders will also be observing the Reserve Bank of India's remarks before India's participation in JPMorgan Chase & Co.'s bond index later this month. When Das makes the rate decision at 10 a.m. in Mumbai, we may anticipate the following from him:
Development and Inflation
It is probable that the central bank will stick to its forecast of a 7% expansion in the gross domestic product and an average inflation rate of 4.5% for the fiscal year ending in March 2025.
According to Das, rate-setters won't change course unless inflation stabilizes at the RBI's 4% goal on a long-term basis. In April, the rate of inflation was 4.83 percent. With growth above 8% in the most recent fiscal year, the RBI has the justification to maintain higher rates for an extended period of time.
While Morgan Stanley and MUFG Bank envision a move until 2025, Goldman Sachs Group Inc. has moved back its estimate for a rate drop to the end of the year. This gives the RBI time to evaluate potential policy adjustments while closely monitoring the monsoon and the Fed's rate path.
ANZ Banking Group Ltd. analyst Dhiraj Nim signified, "The policy calculus of the RBI will remain unchanged. The central bank will continue to prioritize lowering inflation, maintain its hawkish stance for the foreseeable future, and find solace in robust economic growth."
Position on Policy
Since June 2022, the RBI has stuck to its tough position of "withdrawal of accommodation." Since it might indicate the central bank is getting ready to make a shift, most economists don't anticipate a shift from the current somewhat hawkish position very soon.
The Fed's policy outlook and the uncertainties surrounding food inflation make it unlikely that the RBI would act quickly to lower interest rates. The status quo on attitude is anticipated to convey this, according to IDFC First Bank analyst Gaura Sen Gupta.
Liquidity and Bonds
The inclusion of bonds in the Indian bond index highlights the management of the central bank's liquidity. The difficulty will increase as billions of dollars flood into the RBI's bonds, despite the central bank's best efforts to maintain tight liquidity conditions to support rate transmission. According to Abhisek Bahinipati, Head of prop trading at Mirae Asset Capital Markets India, they could think about implementing sell-buy swaps in addition to continuing to hold reverse repo auctions to remove any excess liquidity from the system.
